China's Moderate Foreign Exchange Reserves

Since the reform and opening up,with the continuous expansion of the breadth and depth of China's foreign economic exchanges and the trade between China and the world having become increasingly frequent,the scale of China's foreign exchange reserves has correspondingly undergone tremendous changes.From 1990 to 2014,China's foreign exchange reserves increased from 110.93 billion dollars to 3.99 trillion dollars,the highest point in history.In these 24 years,China's foreign exchange reserves have increased by nearly 360 times.In recent years,as China's economic growth has entered the new normal,foreign exchange reserves have also experienced a corresponding trend of correction after long-term rapid growth.From early 2014 to the end of 2016,China's foreign exchange reserves experienced a decline from the highest point of 3.99 trillion U.S.dollars to the lowest 2.99 trillion dollars.Starting from February 2017,China's foreign exchange reserves rose slightly on a month-over-year basis.According to the data disclosed by the PBOC and the SAFE,China's foreign exchange reserves stood at 3.139949 trillion U.S.dollars until December 2017.On December 1st,2015,the International Monetary Fund(IMF)formally announced the inclusion of RMB in the basket of Special Drawing Rights(SDR).The new SDR basket came into effect on October 1st,2016.After the RMB joins in the SDR basket,the status and role of the RMB will be enhanced in the international arena,and the process of internationalization of the RMB will be accelerated as well.On the domestic aspect,new impetus will also be injected into China's current financial system reform.Under the circumstances of the top-down call of foreign exchange reserves,the RMB's participation in the SDR basket and the two-way fluctuation of the RMB exchange rate,it is of great significance to study the modest scale of the major currencies in the EU and the North American Free Trade Area(ie,the dollar and the euro)in China's foreign exchange reserves.This article mainly sorts out the definition of moderate foreign exchange reserves and the methods for measuring appropriate foreign exchange reserves.Meanwhile,it summarizes the theories of moderate foreign exchange reserves applied by scholars at home and abroad since the 1960 s mainly including the proportional analysis,cost analysis,regression analysis,qualitative analysis,cointegration analysis,wardrobe effect theory and dynamic analysis theory.From the development of these theories,more factors are taken into consideration for the models for measuring the scale of moderate foreign exchange reserves so that these models are becoming more and more reasonable.This paper adopts a dynamic state-space model to measure the scale of China's moderate foreign exchange reserves and the appropriate scale of dollar and euro in China's foreign exchange reserves.This paper first establishes a two-dimensional state space model,using the exchange rate data of USD against RMB and EURO against RMB,then solving the model through Kalman filtering and BGS methods respectively and finally getting a moderate euro multiplier roughly in the range [1.2,1.6] to explain that the modest euro in this model is a multiplier for moderate dollars.Through the multiplier analysis of the modest USD and the modest euro,it comes to the conclusion that the change of the share of the dollar and the euro in China's modest foreign exchange reserves happened in the year of China's accession to the WTO,the share of the dollar falling from 71%-83% to 63%-71% and the share of the euro rising from 17%-29% to 29%-37%.At the same time,the conclusion of the BGS method states: China's foreign exchange reserves were slightly insufficient in the first and second quarters of 1994,while they were sufficient after the third quarter of 1994;From the second quarter of 2011 to the third quarter of 2015,the difference between China's actual foreign exchange reserves and moderate foreign exchange reserves exceeded 1 trillion dollars.During this period,China's foreign exchange reserves were obviously excessive;in the fourth quarter of 2016,moderate foreign exchange reserves decreased,but the modest dollar increased slightly,indicating that the structure of the dollar should be increased in the structure of China's foreign exchange reserves.During this period,internationally,the United Kingdom held the Brexit vote on June 23 rd,2016;Due to changes in the international situation,our country's holding of the euro began to decrease,and the holding of the dollar began to increase.At the same time,on the domestic aspect,this is in line with China's policy of maintaining foreign exchange reserves during this period.Through the analysis of China's foreign exchange reserves by using the Kalman filter and BGS method,other developed countries' circulation currency should be included in China's foreign exchange reserves.After 2016,the proportion of the dollar in foreign exchange reserves should be appropriately raised.The moderate dollar solved by the method of BGS is in a steady state and its upper and lower confidence limits are very narrow.Finally,the international environment and the domestic macro environment will affect China's foreign exchange reserves.Finally,according to China's actual situation,the author puts forward three suggestions for China's foreign exchange reserves management: 1.Establish and improve the management system of foreign exchange reserves and better the relevant systems of foreign exchange reserves.2.The management of foreign exchange reserves needs to be scientifical,systematical,and carefully-subdivided.3.The exchange rate system needs to be further reformed.